Primer: Stock Exchange Delisting Process

If you trade in penny stocks, you absolutely must become an expert in the NASDAQ/NYSE delisting processes. If you don’t understand how delisting works, you are at the mercy of hedge funds that do and use various steps within the process for manipulation and profit.

Listing on a stock exchange comes with certain responsibilities and requirements. Although there are a number of rules that stocks must comply with to maintain continued listing, the sub-$1 share price and sub-$35 million market cap are the ones that penny stocks most often violate. Because of this, these rules are the focus of the following outline.

Major Exchange Delisting Process

The following are typical steps in the delisting process for the major exchanges (including NASDAQ and NYSE):

  1. After 6 months of falling below $1, falling below the $35 million market recap requirement, or violating another continued listing rule, a company is sent initial notification and given 6 months to regain compliance.
  2. After another 6 months (a total of 12 months below $1 or in violation), the company is sent a “delisting notification.” This notification comes with a “right to appeal,” which invites the company to pay a modest fee and make an appeal before a review committee as to why it can regain compliance with an additional 6-month grace period. In most cases, the company makes the appeal and, though I am sure it has happened at some point in time, I have not personally seen a denial on a stock I follow at this point.
  3. Assuming the grace period is granted, the company now has another 6 months to enact its plan and regain compliance (total of 18 months in violation, although I have some some shorter grace periods – such as 3 months).
  4. Theoretically, this last grace period culminates the opportunities a company has to regain compliance before delisting. However, exchanges prefer to avoid delisting when at all possible as they do not make money be getting rid of paying customers. Therefore, it is not uncommon that companies can file an additional appeal and receive an additional, often more limited time-frame and set of requirements, to regain compliance if it can show just-cause.
  5. Finally, after all opportunities for “grace” have been consumed, the company receives a delisting notification letter from the exchange. Even following notification, it takes at least 7 to 10 business days before delisting occurs. Note that the stock may be halted at some point during this waiting period.

Importance of Understanding the Delisting Process

As noted, a lack of understanding of this process puts you at a disadvantage when trading in penny stocks. If companies fail to regain compliance through organic business activities that improve the market’s perception of company/share value, reverse stock splits are a common last resort.

By using an RS to regain compliance, a company can effectively hit the “reset” button and the delisting process starts back at the beginning. Note that the number of grace period extensions is normally reduced when a company has already been granted such extensions previously. Learn more about the connection between delisting and the often-feared reverse stock split in an elite post.

Conclusions and Recommendations

Consider the standard exchange delisting process in relationship to your trading strategy, especially in the penny-stock space. By knowing this process you are less susceptible to misleading message board posts and other fears that relate to unawareness and uncertainty.

After you have are familiar with this process, move on to more advanced content related to reverse stock split and offering-based trading strategies!

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